20150817-Maybank_KERPL-Good_2Q__long-term_a_better_BUY_16页_716kb

Siam Makro (MAKRO TB) Summary

Core Content

Siam Makro (MAKRO TB) is a leading Thai retail company that operates in the cash/carry format, which is less competitive than the hypermarket sector. The company has shown strong financial performance, with a notable increase in net profit and a strategic expansion plan that includes both large and smaller store formats. The stock has been upgraded to BUY due to improved liquidity and long-term growth potential, especially in the GMS region.

Key Financial Metrics

• Share Price: THB39.75
• Market Cap (USD): 5.4B
• Target Price: THB46.68 (+17%)
• Free Cash Flow (USDm): 0.3M
• Dividend Yield (Net): 3.4% in 2017E
• ROAE: 45.0% in 2017E
• ROAA: 14.9% in 2017E
• Core P/E (x): 22.5 in 2017E
• P/BV (x): 9.4 in 2017E

Main Points

• Performance: MAKRO reported an 11% YoY growth in net profit for 2Q15 and 20% YoY growth for 1H15, tracking full year estimates. However, same store sales contracted by 0.9% YoY due to cannibalization and weak consumption trends.
• Store Expansion: The company has accelerated its store openings, increasing the number of big stores from 4-6 to 8-10. In 2015, 16 new stores will be opened, bringing the total store count to 93, and further to 115 by 2017.
• Valuation Methodology: Previously, the company was valued using a DDM model, but due to aggressive expansion, the valuation has shifted to a DCF model. The new target price is THB46.7, reflecting a 17% upside from the current price.
• Liquidity Improvement: CPALL's partial stake sale is expected to improve stock liquidity, removing the 15% liquidity discount applied in previous valuations.
• Growth Potential: MAKRO's cash/carry format is seen as exportable, especially to the GMS region. The company has a significant potential to reach THB300-400B in growth, based on the SME base in Thailand and the opportunity to expand into neighboring countries.
• Operational Efficiency: The company's gross margin has increased slightly, and the net profit margin is supported by a 76% dividend payout ratio and strong EBITDA generation.

Key Information

• Store Formats: MAKRO has diversified store formats, including Classic/EcoPlus, Food Service, and Siam Frozen. The company is focusing on a range of sub-formats to expand its market reach.
• Market Position: MAKRO is dominant in the provincial market but faces competition in Bangkok. The company has a strong member base with an 82% active participation rate.
• GMS Expansion: The company is exploring expansion into the GMS region, with studies ongoing in Cambodia, Laos, Myanmar, and Vietnam. It is seen as a potential leader in this market due to its successful Thai experience.
• Financial Outlook: The company is expected to have a high ROE and maintain a strong dividend policy. It is anticipated to have a peak debt level of 22% in 2016 and a cash balance that will start increasing again by 2019, supporting overseas expansion.
• Valuation Sensitivity: The DCF-based valuation shows that the fair value is sensitive to the terminal growth rate and WACC. A 17% upside is implied based on the current target price.

Peer Comparison

Conclusion

MAKRO is positioned for long-term growth due to its strong operational model, strategic store expansion, and potential for overseas expansion in the GMS region. The upgrade to BUY reflects the improved stock liquidity and the company's ability to manage cannibalization. The DCF-based valuation, with a target price of THB46.7, indicates a favorable outlook despite current market challenges.